If you are becoming an employer or already have employees, you must learn how to do payroll. Handling payroll is an crucial employer responsibility with many steps. Familiarize yourself on how to do payroll by learning about what payroll information you need to gather and the steps you need to follow to pay employees .
Information to gather before learning how to do payroll
Before you can begin running payroll, gather some employee and employer information.
As an employer, you are responsible for preparing your commercial enterprise to pay your employees. This includes things like applying for identification numbers and registering with your country .
Before running a payroll, you must :
- Apply for a Federal Employer Identification Number (FEIN)
- Register with your state
- Get an EFTPS account
- Set up workers’ compensation
- Create a new hire reporting account
An FEIN, or EIN, is a taxpayer identification number used by businesses. If you have employees, you must apply for an EIN .
An EIN is formatted like this : XX-XXXXXXX .
Your EIN helps identify your modest business. typically, you list your EIN on Form W-2, Form 941, and business tax tax return forms .
You can apply for an EIN on-line on the IRS ’ s web site. Or, you can mail or fax Form SS-4, Application for Employer Identification Number, to the IRS .
State and local registration
Every state has different laws employers must follow. Some states require that you register for extra account numbers before you can run a payroll .
Your city or vicinity may even require extra types of employment registration for things like local income tax or school zone tax .
Before you run payroll, be certain to check out your local and state employer data for requirements .
Although not required, you can sign up for an Electronic Federal Tax Payment System ( EFTPS ) to pay your federal taxes .
You can besides use EFTPS to review requital data ( for example, deposit account ) and former payments .
Workers ’ compensation is indemnity that provides engage refilling and medical benefits to employees who get pale or hurt at work .
Before you begin running payroll for employees, check into your options for workers ’ compensation coverage .
New hire reporting
You must create an on-line report or contact your submit to report new hires that you ’ ra adding to your payroll .
Under federal police, you must report new hires within 20 days of hiring them. State laws for new hires can vary. Check with your submit for more information on your timeframe and steps for new hire report .
Before you can start running payroll, you must besides determine employee information, such as proletarian classification, requital method, and if your employees will be wage or hourly .
You must besides gather authoritative newfangled rent documents, such as :
- Form W-4
- State W-4 form (if applicable)
- Form I-9
Your employees can either be considered exempt or nonexempt. Worker classification impacts how you process payroll. Before running payroll, you need to correctly categorize your employees .
Exempt employees :
- Make at least $35,568 per year or $684 each week
- Are paid on a salary basis
- Have executive, administrative, or professional job duties
- Do not receive overtime pay
Nonexempt employees :
- Must be paid at least the federal minimum wage
- Receive overtime wages for any hours worked over 40 per week
- Have job duties that are not considered exempt (e.g., clerical workers)
You need to determine how you want to pay employees. There are a few methods to choose from, including :
- Direct deposit
- Handwritten or printed paychecks
- Pay cards
Weigh the pros and cons of each method acting before deciding how you want to pay your employees. Employers can opt to do a concoction of methods, excessively, such as giving employees the choice between receiving a hindrance or lineal deposit .
Some states have laws in target about payment methods. Check with your state for more information about laws pertaining to different requital methods ( for example, pay card laws by express ) .
Depending on the method you choose, you might need to collect bank account information from your employees before you can run payroll .
Hourly vs. salary
You can either pay your employees on an hourly or salaried basis .
With a wage, you pay employees a fixed sum each give period. If you pay employees hourly wages, you must pay an hourly rate. An hourly employee ’ sulfur total wages are based on the number of hours they work .
IRS Form W-4, Employee ’ s Withholding Certificate, is an IRS kind newly employees must fill out .
On Form W-4, employees can enter information you ’ ll use to determine how a lot federal income tax to withhold from their wages .
State W-4 form
many states have state income tax. If your employee works in a country that requires you to withhold country income tax, they must fill out a state of matter W-4 form .
Check with your state to see if it requires your employees to fill out a department of state W-4 .
Form I-9, Employment Eligibility Verification, is a mannequin that confirms your employees are legally allowed to work in the United States .
Before you can authorize use, you and your employee must complete Form I-9 .
Your employee fills out the first incision. then, you need to fill out the irregular segment. Your employee must besides provide acceptable identification ( for example, pass ) and software documentation .
Use information from Form I-9, such as appoint, address, and Social Security number, to run payroll. Keep Form I-9 in your payroll records .
Choosing a payroll method
As an employer, you have a couple of ways you can handle payroll. You can opt to do manual payroll calculations by hand. Or, you can use payroll software to do the calculations for you .
Doing manual calculations can be time-consuming and leave room for errors. You must double and triple check to ensure your calculations are accurate. flush though it uses up more of your time, manual of arms payroll allows you to cut down on costs when it comes to payroll .
After entering payroll data, payroll software handles the calculations for you. however, you need to make sure you input the information correctly. Because payroll software computes the payroll taxes for you, it helps you save time running payroll .
Interested in software but not sure what you’re looking for? Download our free guide (yes, we said free), “9 Things to Consider When Choosing Payroll Software,” to learn what to shop for!
Before you begin doing payroll, you have to decide which method is best for your business .
How to do payroll
now that you know what kind of information you need before running payroll, it ’ s time to learn how to run a payroll. Running a payroll can be broken down into four easy steps :
- Enter payroll information (e.g., employee information and wages)
- Deduct payroll and withholding taxes
- Approve payroll
- Pay employees
You might need to tweak the steps depending on whether you ’ rhenium doing payroll by hand or using software. Dive into how to run payroll below .
1. Enter payroll information
If you ’ re using on-line payroll to determine employees ’ payroll, you will need to enter requital information .
To start your payroll, you need to include some details, such as :
- Employee information (e.g., names)
- Pay period
- Hourly or salary rate
- Gross wages
- Overtime pay (if applicable)
If you use time cards or time and attendance software, you can collect payroll information for the give period .
If you ’ re doing payroll by hand, be sure to gather employee time data and count gross wages .
Use Forms I-9 and W-4 to input employee information. If you ’ rhenium using payroll software, you should have a section where you can add employee information .
When you pay employees, you must determine how frequently you would like to pay them. normally, yield frequencies are weekly, semiweekly, semi-monthly, or monthly .
Your frequency helps dictate when you pay your employees. For model, if you pay your employees fortnightly, you pay them once every other week .
You must run payroll systematically and on a regular footing. That way, employees know how often you will be paying them.
When you do your payroll, make sure you indicate the give period and give date .
Hourly or salary
future to your employee data, you should besides include whether the employee is wage or hourly .
You can organize your payroll by wage vs. hourly to avoid confusing employees ’ rates and frequencies .
You should besides include the arrant wages for both hourly and compensated employees .
For hourly employees, you need the pay pace per hour and the number of regular and overtime hours worked. To find an hourly employee ’ second crying wages, multiply the number of hours worked by their hourly pay up rate .
Hourly gross wages = Hours worked during pay period X Hourly give rate
Say your fortnightly employee makes $ 10 per hour. They work 32 hours during the pay period .
$ 320 = 32 hours X $ 10 per hour
The employee ’ s gross pay for this period would be $ 320 .
Gross wages for compensated workers are a small different than hourly employees. For wage employees, you need their wage per pay up time period and hours worked .
If your compensable proletarian is nonexempt, keep track of their overtime hours, besides .
To find wage per pay period, divide the employee ’ s annual wage by the number of yield periods in a year .
Say your compensated employee makes $ 52,000 per annum. You pay the employee on a weekly basis .
Salary gross wages = Annual wage / Number of pay periods per year
$ 1,000 = $ 52,000 / 52
If you ’ re uncertain about how many pay periods your compensated employee has per year, take a expression at this chart :
If your employees are eligible for overtime wages, you must besides include that in your calculations. The overtime rate is an employee ’ s regular rate times one and a one-half. Overtime wages are separate from regular wages .
Let ’ s take a spirit at calculating overtime pay up. Say your employee makes $ 20 per hour. They worked five hours of overtime .
Overtime rate = Employee ’ s regular rate X 1.5
$ 30 = $ 20 X 1.5
Your employee ’ s overtime rate is $ 30 per overtime hour. Because your employee worked five hours of overtime, their gross overtime give is $ 150 ( $ 30 X 5 hours ) .
When handling payroll, be certain to calculate or input overtime wages for applicable employees .
2. Deduct payroll and withholding taxes
After you determine each employee ’ randomness wage time period and gross wages, it ’ s time to calculate payroll taxes and deductions .
As an employer, you must pay, withhold and remit payroll taxes. You might besides need to handle extra deductions, such as retirement plans and health policy premiums. Before you finish payroll, be sure to account for any employee or employer contributions and deductions .
Depending on where your business and employees are located, you might have extra state and local anesthetic taxes .
If you ’ ra doing payroll by hand, you must calculate your payroll taxes. If you use payroll software, the system calculates taxes mechanically .
Common payroll taxes include :
- Employee and employer portions of FICA tax (Social Security and Medicare)
- Federal income tax (FIT)
- FUTA tax
- SUTA tax
- State and local income taxes (if applicable)
The Federal Insurance Contributions Act ( FICA ) tax includes Social Security and Medicare taxes .
Social Security tax is 6.2 % of each employee ’ sulfur wages. You must withhold 6.2 % of the employee ’ mho pay from their wages .
As an employer, you must besides contribute 6.2 % for Social Security each paycheck. social security does have a wage base limit of $ 142,800 for 2021 and $ 147,000 for 2022. This means that once an employee earns above this engage base, you and your employee must stop contributing to Social Security tax for the tax year .
Medicare tax is 1.45 % of each employee ’ randomness wages. You must besides contribute a equal 1.45 % as an employer. Medicare tax does not have a engage base terminus ad quem. however, you must withhold an extra 0.9 % when an employee meets one of the succeed thresholds :
- $125,000: Married filing separately
- $200,000: Single
- $250,000: Married filing jointly
You do not need to contribute the extra 0.9 % for Medicare tax— it is merely for employees .
raw, FICA tax is 15.3 % of your employees ’ wages per paycheck, including both the employee and employer parcel .
Federal income tax
FIT is different for every employee. The amount you withhold for an employee ’ s federal income tax depends on the employee ’ randomness Form W-4 withholding information .
You can calculate FIT by pass using IRS Publication 15. Or, you can use payroll software to calculate it for you .
Although employers don ’ t have to contribute to FIT, they are placid responsible for withholding it from employees ’ wages and giving it to the government .
federal Unemployment Tax Act ( FUTA ) tax is an employer tax. Do not withhold FUTA tax from employee wages .
You must pay FUTA tax if you :
- Paid $1,500 or more in wages during any calendar year
- Had at least one employee for part of a day in any 20 or more different weeks during the year
The FUTA tax rate is 6 %. FUTA tax only applies to the first $ 7,000 you pay each employee in the calendar year. Stop paying FUTA tax on an employee ’ mho wages once you pay the employee more than $ 7,000 for the year .
Employers can besides receive a FUTA tax credit on their rate. The accredit reduces your federal unemployment tax rate. The largest possible FUTA tax credit is 5.4 %. Employers with the maximum accredit only owe 0.6 % on the first $ 7,000 of each employee ’ mho wages annually ( 6 % – 5.4 % = 0.6 % ) .
State Unemployment Tax Act ( SUTA ) tax is state unemployment tax employers need to pay. Unless you are excuse ( for example, nonprofits ), you must pay SUTA tax. Like FUTA tax, states set their own engage base limits ( for example, $ 7,000 ) .
Each submit has its own bent of requirements and SUTA rates. Rates can vary depending on your industry, feel, and employee employee turnover .
State and local income taxes
Depending on your state and vicinity, you might need to withhold extra taxes from employee wages. Check with your local and state income tax departments for more information .
3. Finish or approve payroll
If you ’ re using payroll software, bivalent check all of the data you have entered to make sure it ’ randomness correct. Misentering information can result in ongoing payroll problems. once you ’ ve verified the information, you can approve your payroll .
If you ’ ra handling payroll by bridge player, check over your calculations and payroll information .
Doing payroll by hand or using payroll software can both leave room for error. Because of this, it ’ randomness all-important to check your data before distribute wages .
4. Pay employees
After you approve or finish your payroll, distribute wages to your employees. As mentioned, you have multiple options for payment methods .
Regardless of which requital method acting you decide on, you should provide a pay stub to each of your employees. Pay stubs give employees a dislocation of their gross wages, withholdings, deductions, contributions, and more .
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This article has been updated from its original publication date of April 14, 2017 .
This is not intended as legal advice ; for more information, please snap here .